Challenges of a new tax regime for Malaysia

GST is a game changer," declares Customs Goods and Services Tax (GST) director Datuk Subromaniam Tholasy at his Putrajaya headquarters.

With hundreds of officers under his wing, the jovial-looking Subromaniam is the point man for the Government as it undertakes its most radical tax overhaul since the Independence.

A political hot potato, the impending GST has been a subject matter the Government has skirted around since the days of Datuk Seri Anwar Ibrahim as Finance Minister in the 90s. More than a decade later, Prime Minister Datuk Seri Najib Tun Razak is finally taking the plunge to push forward the controversial flat rate consumption tax which will replace the Sales and Service Tax (SST).

His announcement that the GST would be effective April 1, 2015, had been highly-anticipated during Budget 2014 last October.

It will come during a time when the Government is striving to reduce the country's fiscal deficit, which shrunk to 3.9 per cent in 2013 compared with 6.6 per cent of Gross Domestic Product (GDP) in 2009.

Malaysia aims to achieve a balanced budget by the end of this decade and the Government views the GST as a long overdue tax reform that will also increase its indirect tax revenue collection.

But the biggest challenge that the Najib administration faces is the perception that the GST will bring about general rise in the prices of goods and services.

Questions about rising prices are something that Subromaniam is continually bombarded with, even from ministers in the Cabinet. Click to view detail graphic

"In theory, we should see a slight reduction for some items where businesses will be able to claim input tax they incurred. I will be very surprised, ceteris paribus, if prices go up," he tells StarBizWeek.

Teething problems aside, he says the GST regime will stabilise prices in the long-term, with very little price change in most products.

Of course, he says this does not factor in rising or falling commodities prices which affect production costs or shifting market supply and demand conditions.

Shrinking the shadow economy

Finance Ministry officials say that an area that the GST will capture is the shadow economy, a problem which plagues governments around the world as enormous revenue losses are sustained.

Currently, nobody can put a finger on what the total value of the economy that is not being captured under the current tax system is.

However, the ministry's tax division deputy under secretary MA. Sivanesan says international studies have shown that the shadow economy is between 25 per cent and 30 per cent of Malaysia's GDP.

He notes that not all of these businesses are operating illegally but also comprise legitimate businesses that are too small.

Sivanesan believes the GST will help shrink the shadow economy as it will benefit businesses to register under the system so they can claim input tax for costs incurred.

"Because of the nature of the input tax claims, the GST regime will serve as an incentive for some of these businesses to come out and register," he says.

Eliminating the tax cascading effect

Subromaniam says many consumers are unaware of the current "cascading effect" of the SST, where prices of goods actually contain hidden costs accrued down the supply chain.

Subromaniam says the GST will stabilise prices in the long- term.

"These hidden costs also result in the Government losing out on collecting indirect tax revenue," he says.

The GST model will eliminate this cascading effect, he says, with consumers no longer needing to bear the hidden costs.